This year the IRS announced there will be an increase to the maximum employee 401(k) contribution limit for 2023, increasing it to $22,500, a $2,000 increase from the 2022 tax season.
There will also be a change to the maximum allowed for catch-up contributions. Those represent the additional amount of contributions that you can make to a 401(k) plan if you are age 50 or older.
For 2023, that number will increase at $7,500. That means the total contribution for plan participants age 50 and older is $30,000.
Every year, in October, the 401(k) contribution limits are reviewed.
Table of Contents
- Everything You Need to Know About 401(k) Contribution Limits for 2023
- The Contribution Limits Also Apply to Roth 401(k) Contributions
- How Much You Should Contribute With the New Contribution Limits
- Tips for Contributing to Your 401(k)
- What We Can Expect of Contribution Limits in the Future
- Will Increased Taxes Impact 401(k) Contributions?
- Final Thoughts on 401(k) Contribution Limits for 2023
Contribution limits increase more during years when the inflation rate is higher, and less when it is lower, as it has been in the past few years. At times, there have even been concerns that the contribution limits might be reduced, based on a negative inflation rate.
Fortunately, however, that scenario has never played out, and the limits have either been increased slightly or left flat.
Everything You Need to Know About 401(k) Contribution Limits for 2023
The chart below shows the base 401(k) maximum contribution, the catch-up contribution for employees ages 50 and older, and the maximum allocation from all tax-sheltered retirement plans, from 2009 to 2023.
As you can see, the rate of increase over the past eleven years has typically moved at a snail’s pace. There has been only a $3,000 increase in the maximum contribution since 2009 and an even smaller increase in the catch-up contribution over the same space of time.
And as you can also see, contribution limits have stagnated in the past, such as 2009 through 2011, when they remain at $16,500 for three years in a row. Even more obvious is the lack of increase in the catch-up contribution for a full six years, when the amount remained at $5,500 from 2009 through 2014.
From 2009 through 2023, the maximum increased from $49,000 to $66,000. That’s an increase of $9,000 over 10 years, which works out to be over 2% per year.
401(k) Contributions Over the Years
|Year||401(k) Maximum||Catch-Up Contribution||Maximum Allocation|
For each year, the maximum allocation is increased by the amount of the allowable catch-up contribution (which applies to workers 50 and older). For example, for 2023, the maximum allocation is $73,500. That is the maximum allocation of $66,000, plus the $7,500 catch-up contribution.
The Contribution Limits Also Apply to Roth 401(k) Contributions
Contribution limits for Roth 401(k) contributions are the same as they are for traditional 401(k) contributions. That means you can contribute up to $22,500 per year to either a regular 401(k) plan, or a Roth 401(k) plan.
More likely, you will want to contribute to both, in which case you’ll have to allocate how much of the $22,500 limit will go into each part of your 401(k).
Not coincidentally, the 401(k) limits are virtually the same as the limits for both the 403(b) plan and the Thrift Savings Plan (TSP).
In addition, any employer matching contributions to the plans are not included in the employee contribution limits listed above.
Your employer can contribute a matching contribution that exceeds the $22,500 regular contribution limit, or even the combined $30,000 limit if you are age 50 or older. It is always a good idea to figure out whether a Roth 401(k) vs Roth IRA is best for you.
How Much You Should Contribute With the New Contribution Limits
The IRS determines whether or not to increase its contribution limits based on an annual basis. Sometimes changes in the Consumer Price Index (CPI) have been very small, like on the order of 2% per year. Congress prefers to increase contributions in increments of at least $500, which they did this year.
If you divide that amount into monthly contributions, you’re making only slightly smaller payments which will benefit you in the long run. Continuing to max out your 401k at this level is an ideal strategy,
Tips for Contributing to Your 401(k)
For most workers, the flat or level 401(k) contribution limits over the past three years aren’t the real problem. The real problem is a lack of employee participation. A large percentage of employees do not participate in a 401(k) plan, even though one is offered by their employer.
How much are American workers contributing to their 401(k) accounts? Each age group has different tendencies, of course. Data from Fidelity shows Americans in their 30s have an average of $38,400 in their 401(k) accounts, with an average contribution rate of 8% of income. For Americans in their 40s, that number was $93,400, also with an average contribution rate of 8%.
The same data shows workers in their 60s contribute 11% of their income to a 401(k).
Contribution limits have only been increased by $500 in five years, but $19,500 still represents a lot of tax-deferred savings potential. Do what you can to get as close to the maximum contribution possible, especially as you move closer to retirement.
Take Advantage of the Maximum Allocation
The biggest number on the chart above for each year is in the Maximum Allocation column. That is the maximum amount of money that you can contribute to all tax-sheltered retirement plans that you have available to you. It’s actually a more important factor than most people realize.
Despite the increasing 401(k) contribution limits, the average person isn’t coming close to maximizing their potential contributions to retirement plans of all types. The 2023 maximum allocation for all plans is a very generous $66,000, or $73,500 for workers 50 and older.
That’s the amount of money that you can contribute even beyond your 401(k) plan. You may be able to make tax-deductible contributions to a traditional IRA, or non-tax-deductible contributions to a Roth IRA if your income is within the limits for either plan.
Contribute to an IRA
Even if your income exceeds the threshold for a tax-deductible contribution – in addition to being covered by an employer plan – you can make nondeductible contributions to a traditional IRA, regardless of your income.
A $6,500 IRA contribution, in addition to contributing $22,500 into a 401(k) plan, will increase your contribution to $27,000 per year (or $37,500 if you’re 50 or older).
But beyond IRAs, there are also several types of tax-sheltered retirement plans for the self-employed, including SEP and SIMPLE IRAs. If you have a side business, you can maintain these retirement plans for that business.
They will allow you to contribute more money to a tax-sheltered plan. You can go as high as $66,000 total, which gives you plenty of room to make more contributions.
Take Full Advantage of your 401(k) With Personal Capital
Aiming to make 401(k) planning more of a help and less of a headache, Personal Capital is an asset management software that steps in where your employer often falls short.
For instance, Personal Capital offers assistance with the following important tasks:
- Avoiding: unwanted hidden fees
- Evading: pesky account minimums
- Determining: accurate stock-to-bond ratios
- Assessing: whether your current plan meets your long-term retirement goals
- Shifting: full partnering responsibility to the employee instead of the employer
The free 401(k) analysis tool provides managing suggestions you must pursue on your own.
- Use their Fee Analyzer™ to find hidden fees
- The app is 100% free
- See all your money accounts in one place, in real-time
What We Can Expect of Contribution Limits in the Future
The good news is that we have been in a prolonged time of low inflation. That’s good news in regard to the cost of living, even though it has kept a lid on maximum 401(k) contribution limits.
Since that seems to be a long-term pattern, we should probably expect several more years of either low or nonexistent increases in the contribution limits.
But that makes an even stronger case for maximizing the contributions that you make within the limits that we have, as well as investigating the possibility of contributing to the other retirement plans, such as IRAs or the various plans that are available for the self-employed.
We have to work within the limits that we have and recognize that they are more than enough to help us reach our retirement goals. Those limits will allow us to do just that, even if they don’t increase significantly in the future.
Will Increased Taxes Impact 401(k) Contributions?
Concerned about how a potential tax hike could impact your 401(k) contribution? Some experts are expecting various tax hikes across the board due to COVID-19 expenses. Tax hikes could be passed to individuals as an increase in property taxes, income taxes or even business taxes.
Expert commentary on the 2017 Tax Cuts and Jobs Act also notes that there are federal tax increases every two years, starting in 2022 which could see even those earning below $75,000 annually facing a tax increase.
Since tax hikes could impact your monthly budget, it’s important to review your finances if these hikes come to fruition. Ensure you’re saving enough each month to make the retirement contributions you’re comfortable with.
Final Thoughts on 401(k) Contribution Limits for 2023
The IRS increased the 2023 maximum 401(k) contribution limit to $22,500, with a catch-up contribution of $7,500 for those 50 and older. Changes in inflation affect the limits, which have risen gradually. Consider factors like loan type, personal loan requirements, and loan terms before applying.
Roth 401(k) contributions share the same limit as traditional ones. To maximize contributions, participate, allocate funds effectively, and contribute to an IRA. Personal Capital offers 401(k) planning assistance. Despite low inflation, contributions within existing limits can still help reach retirement goals. Prepare for potential tax hikes that could impact 401(k) contributions.